Development Strategies Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122 Fall 2005.

Development Strategies

Linda YoungPOLS 400International Political EconomyWilson Hall – Room 1122

Fall 2005

Linda Young

Bretton Woods Conference – 1944

Rejected economic development as a goal of the global economic structure

Gilpin argues the World Bank and IMF set up to serve interests of dominant powers

The World Bank

Linda Young

Development Strategy

Disagreement on the role of the state versus the market in economic development

1945-1970 – development economics

1970– present “neo-liberalism and structural

adjustment”

1990-present – fierce disagreement “development state”

Linda Young

Development Economics: Rise to Demise

Less developed countries fundamentally different– Special conditions meant neo-

classical economics doesn’t apply– Characterized by “excess labor”– Arthur Lewis argued excess labor,

low productivity and wages couldbe tapped to accelerate economic development

Export pessimism– Unfavorable and declining terms of

trade (price of imports to exports) – Trade can’t be engine of growth

Source: “The State of Agricultural Commodity Markets.” Food and Agriculture Organization of the United Nations (FAO), Rome, Italy, 2004.

Declining terms of trade for agricultural products

Products sold by least developed countries most price variability

Declining real prices for agricultural goods

Least developed countries reliant on commodities with steepest

decline on world markets

Source: “The State of Agricultural Commodity Markets.” Food and Agriculture Organization of the United Nations (FAO), Rome, Italy, 2004.

Source: “The State of Agricultural Commodity Markets.” Food and Agriculture Organization of the United Nations (FAO), Rome, Italy, 2004.

Decline in Africa’s Terms of Trade

Comparison of the Terms of Trade

Source: “The State of Agricultural Commodity Markets.” Food and Agriculture Organization of the United Nations (FAO), Rome, Italy, 2004.

Linda Young

Other Difficulties in Developing Countries

Victims of “late-late” development– 19th century: Japan and Germany

enjoyed advantage of ripping off the experiences (and technology) of early developers

– Unable to compete with much more developed economies

– State and international community must assist to overcome obstacle

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Could Not Compete

High tariffs and

state effort to

alleviate cycle of

poverty

Development to

break the cycle

LowSavings

LowInvestment

Uncompetitive Exporters

Inefficient Industries

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The State Needed to Initiate “BIG PUSH”

Overcome market failures– lack of entrepreneurship– low national savings– poor educational systems– little consensus on which industries

to assist among economists or states

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Triumph of Neo Liberalism1970s and 1980s

Gilpin’s disgust is evident:

Triumph began with a change in the nature of economic thought and methodology

Building on Paul Samuelson’s Foundations of Economic Analysis: switch from descriptive and analytical to mathematical

If cannot be expressed in an equation, then not important

Problems of economic development not captured in this paradigm

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Epistemic Community

Defined as a network of professionals with recognized expertise and competence in a particular area and authority to policymaking within that area

World Bank as extremely important in ideas about economic development– affects terms of loans– largest group of development economists– largest research budget of any institution– researchers largely US trained

US power: more votes, located in WDC, English language

Linda Young

Remember Keynesian Revolution

Thought that government needed to/should play a role in the economy

Great depression was due to market failure– equilibrium not re-established with

market forces– government needed to intervene to

increase demand

Not “one economics” that applies everywhere

Different types of economies – including developing economies

Linda Young

Keynesian Economics Attackedin 1960s and 1970s

Monetarists

Rational expectations

Schultz: less developed country farmers rational profit maximizers

– True: but market failure might exist

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Neoclassical Economics

Distort incentives

Argued that underdevelopment due to wrong-minded government policies:

Government failure

Inhibit market forces

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Government Failure

Not different economies in nature

Nor a “vicious cycle”

But government failure:

– Market openness– Fiscal discipline – Little intervention

Lead to growth

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Then, Debt Crises

Debt crises – failure of import substitution

emphasized growth to overcome insolvency

Less developed countries borrowed from banks

Collapse of Soviet Union

Supremacy of market orientation

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Washington Consensus

“Broad agreement among government officials in both the industrial economies and international institutions on the importance of the neo liberal program for economic development and its emphasis on free markets, trade liberalization, and a greatly reduced role of the state in the economy.”

– Gilpin, page 315

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Changed Role of the IMF

Because now involved in long term adjustment, and

Adjustment involved fiscal and trade policies

Involved in microeconomic policy, not just original mandate of macroeconomic policy

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The Developmental State

Challenged neo-liberal consensus

Led by Japan– lack of congruence with their

experience and the Bank’s philosophy

Japan and East Asia– state governed / led the market

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Neo-Liberal Explanation of East Asian Miracle

South Korea, Taiwan, Hong Kong, Japan and Singapore

“Market conforming” strategies

Opened economies to the world, reduced the role of the state, pursued export-led strategies

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Theory of the Developmental State

Government incentives for private investment in strategic industries– Created an entrepreneurial class– Identified key industries– Exposed them to the global market

Share concern of “late late” industrialization

Market failure necessitating the state

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South Korea and Taiwan

Late 1950s Taiwan and 1960s South Korea– from security to economic development

Taiwan’s 19-point plan– simplified administrative procedures– liberalization of regulations– tax incentives, less direct credit subsidies– maximum business tax reduced to 18%

of income from 32%– tax holiday for new investments– tax exemption for exports

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South Korea

Coup 1961 – Government nationalized banks

– had control of their capital

– extension of credit at negative interest rates

– other lending at half the rate

– socialization of risk in other sectors

– President Park guaranteed government would bail out unsuccessful investors in specified sectors

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More on Taiwan and South Korea

Taiwan: government encouraged investment in plastics, textiles, fibers, steel and electronics

Both governments assured that key inputs available– Taiwan: state established upstream industries

and then handed them over to the private sector– State successful in public enterprises as well– Accounted for large share of manufacturing

output and investment and that increased in the takeoff of the 1960s

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Alliance Capitalism

Intimate relationships between the government, local banks and industry

Channeled money into ‘promising” industries

Restricted both FDI and portfolio investment

– insulated economies from disruptions

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Some East Asian Economies

Also benefited from security concerns

Target for preferential treatment by Japan and the US

Also Japan’s colonialism left infrastructure

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East Asian Characteristics Helpful

State autonomous – able to act– Deference to hierarchy– Tradition of hard work– Subordination of individual to

community States authoritarian but

– Land reform, income equity and education

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Application Elsewhere

Selective opening managed by the state– Brazil and automobile industry

Combines political independence and a role for the state

Unresolved: exports cause growth or vice-versa?

Linda Young

The Argument: Japan got Mad

World Bank rejected the model behind Japanese success

Japanese mad at World Development 1992 (report by the World Bank)– Neo liberal model– “still signed the checks” and financed

a study on the East Asian Miracle– Question: model of fundamentalism

or the alternative “mystical” approach of endogenous growth theory

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Criticisms of the Report

Suggests that economic development is a straight forward process – factor accumulation through private sector investment, education and exports; and

Assumes that it is possible to disentangle those ‘fundamentals’ from underlying social institutions and government actions

– High savings rate is the result of government policies and institutions (in China private savings are anonymous – to encourage savings in light of fears of government appropriation of savings)

– Large investments in education are not due to the invisible hand of the market